Vince Petrozza, chief operating officer of Fortress Real Developments, leaves the company offices in Richmond Hill, Ont., on Nov. 21, 2017.CHRIS HELGREN
The Crown opened the fraud trial of the two co-founders of now-defunct syndicated mortgage company Fortress Real Developments Inc. on Monday arguing they deceived the public and lined their own pockets with investors’ funds. A defence lawyer, meanwhile, disputed the Crown’s allegations of criminality and argued Fortress provided investors with ample documentation of the risks involved in the investments.
Both sides in the trial of Jawad Rathore, Fortress’s former chief executive officer, and Vince Petrozza, the company’s former chief operating officer, delivered their opening arguments in a Toronto courtroom in a case involving the sale of higher-risk, syndicated mortgage products to retail investors.
Mr. Rathore and Mr. Petrozza are each charged with one count of fraud and one count of accepting secret commissions.
Builder defaults on payments linked to Fortress Real Developments collapse
The pair founded Fortress in 2008 to help developers raise money for real estate projects in their initial phases, when it’s especially challenging to secure financing. Typically, this type of investment had been available only to institutional and wealthy investors. Fortress allowed mom-and-pop investors to pool their funds and get in on the financing of early-stage developments, and in so doing popularized the concept of bringing syndicated mortgages to the masses.
Through affiliated mortgage brokerage firms, more than 14,000 retail investors provided $920-million in financing for 80 construction projects in cities across Canada. While some of these projects were completed, others failed.
The exact size of the losses is not known. However, FAAN Mortgage Administrators, the court-appointed trustee tasked with winding up the projects, has said the losses could total hundreds of millions of dollars. A group representing victims who invested in Fortress’s syndicated mortgage products has estimated the losses at $416.7-million.
The Crown alleges that Mr. Rathore and Mr. Petrozza deceived investors, for instance by telling them that their funds would be secured at loan-to-value ratios of about 80 per cent, meaning that the amount borrowed was equal to 80 per cent of the value of the asset.
However, those ratios were calculated based on opinions of value, which were falsely represented as appraisals, according to Crown attorney Scott Patterson. The actual appraisals, which valued the properties at substantially less, were held back from investors, Mr. Patterson said.
Doing so allowed Fortress to secure larger loans, from which they “stole” millions of dollars, argued Mr. Patterson, noting that under agreements with developers, Fortress would receive 50 per cent of a project’s profits. The company received payments from the developers in the form of advances on those future profits, and those payments were not disclosed to investors, according to Mr. Patterson.
The company disclosed its “priority returns” and the methodology used to arrive at the valuation opinions, Gerald Chan, Mr. Petrozza’s lawyer, argued.
“There was nothing fraudulent or secretive going on,” Mr. Chan said in his opening arguments on behalf of both defendants.
Although some of Fortress’s projects ultimately failed and investors lost money, a failed project is not indicative of a fraud, Mr. Chan argued. Syndicated mortgages are risky investments, and those risks were explained in the documents, he said.
Furthermore, while Mr. Rathore and Mr. Petrozza helped draft the disclosure documents, it was the brokers and agents who promoted the syndicated mortgage products who had a fiduciary duty to investors, Mr. Chan said. The defendants also retained law firms Norton Rose Fulbright and Gowling WLG to help them prepare the documents and deal with regulators, he noted – indications not of a fraud but of a growing, thriving business seeking professional assistance, according to Mr. Chan.
He argued that Fortress was a “creative” business that fulfilled a valuable need in the marketplace: providing financing in the early stages of construction, when banks are hesitant to provide financing to projects due to their lack of revenue. Without being able to cover those early-stage costs – which can include expenses associated with permitting, zoning and presentation centres – projects are not able to get off the ground, according to Mr. Chan.
The defendants were charged in 2022, more than four years after officers from the RCMP’s Integrated Market Enforcement Team executed a search warrant at Fortress’s head office.
Mr. Chan argued that Mr. Petrozza and Mr. Rathore are not guilty and should be acquitted.
The trial is scheduled to last for several weeks and will hear from numerous witnesses, including developers, brokers, valuations, investors, Fortress employees and police.